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Clustering Revisited


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by Roy Phillips


Learn from this clustering success story.


In the 1980s, some enterprising insurance agency owners introduced the organizational concept of Clustering. My partners and colleagues, Dan King and Janice Callihan, and I were among the first to explore the potential benefits of this structure.


Clustering is defined as the unification of separate elements to provide greater strength and benefit for the collective good. Although 'branches tied together' may be a simplistic example, cumulative strength is the desired goal.


An Independent Insurance Agency cluster is an organizational structure with the legal standing of either a C corporation, S corporation, Limited Liability company, or partnership, whose purpose is to provide a single point of contact for insurance carriers. With selected product lines, sufficient premium volume, and professionally management, the cluster offers agency members economies of scale that allow them to attain their desired goals successfully.




Recently, I've received several referrals directly related to clustering, from IMMS Chairman George Nordhaus and from my friend and colleague, Don Eve. This resurgence of interest in clustering reflects the new dynamics of insurance carrier consolidation and agency selection. Nordhaus notes that the Independent Agency System has been reduced from over 80,000 independent agencies to about half that number.


What's more, consolidation and outright acquisition in the carrier arena indicate the tolling of the bell for many independent agency carriers, and thus a decimation of many agency contracts. Think about this for a moment: Did you ever think you'd see the day when with Aetna Life and Casualty or Continental Insurance Co. would no longer proudly unfurl its masthead over a P/C policy?


A cluster can take whatever form best suits the needs of its member agencies. For convenience and cost effectiveness, members might choose to consolidate certain functions in a central service center. This facility could share space with a member agency or exist in separate locations. Clusters work equally well in rural, urban, or suburban settings.


Clusters may provide client support services in Personal Lines, Commercial Lines, and/or related lines such as Group, Disability, and Life products. They may be computer-driven, with modems that provide immediate access to policy applications, coverages, claims, and pertinent renewal requirements. Modem use may be expanded to carrier interfacing for policy input, printing, or downloading data already captured by individual carriers.




In late 1995, my company received a referral from Don Eve, in conjunction with three well-managed agencies in the Northeast. With longstanding personal relationships between the individual owners, they sought to form an alliance that would place them in a collective proactive role to meet the dynamics of insurance carriers' future planning. They wanted to:

  1. Develop account rounding in Personal Lines with a professionally managed effort that would end the industry tendency to offer lip service in this important product line
  2. Provide selected carriers with one point of contact that would meet volume requirements and offer greater potential market stability and competitive pricing
  3. Encompass their goals in a professionally managed profit center, organized in a separate C corporation, with a member agency management team overseeing and ensuring its success
  4. Coordinate the emerging efforts of carriers to establish their own service centers to deliver the product to the client and the premium to the carrier, without duplicating carrier intentions
  5. Provide underwriting controls at the agency level, through the establishment of a third-party, arms-length manager and staff, to eliminate the potential exploitation of carrier confidence
  6. To offer selected carriers an opportunity to recommend valued, but smaller, agents to an organization that could assimilate their profitable books of business to meet premium volume objectives
  7. To develop a systematic method of due diligence in researching the pedigree of prospective cluster members


The prospective members provided us with confidential and sensitive information, which we used to conduct objective due diligence, and establish why each party wanted to pursue this effort. Their financial, marketing, and management philosophies were in sync. Our three parties had several things going for them in this enterprise:

  • They knew, liked, trusted, and respected each other-not a bad benchmark for any relationship.
  • They were each established in their own right, and had proven management skills.
  • The major carrier player was represented in all three agencies, and had embraced the concept, endorsing the effort in progress-a real blessing.
  • The members had individual skill levels in the areas of finance, personnel, insurance markets, marketing, product knowledge, and operational management. (Boy, were we glad to see that!)
  • There was youth in two of the member agencies, an element often missing in our tired, graying industry.
  • Most of all, these folks came to the table with the realization that everyone had to give, adjust, and contribute.


Our site visit consisted of two days of education and examination. We took the editorial liberty of rewriting the founding documents, which included the mission statement, organizational objectives, insurance carrier role, and pertinent job descriptions. We also recommended areas of responsibility for the management team that mirrored the purpose and objectives of the newly formed entity.


We then unveiled the Personal Lines Service Center. It's a C corporation, licensed in the members' state, meeting the Department of Insurance Codes, with its own E&O insurance naming member agencies as additional insureds. Furthermore, it signs contracts with selected carriers, receives direct bill statements and revenues, distributes those revenues into the income and expense statement of the Center, and ultimately distributes the remaining profits to the three agencies.




Ownership is often a matter of controversy. Here's how it works in this case: The three agencies' owners took an equal equity position in the Center. Each agency continues to own its own book of business and operates under a management agreement between the agency and the Center. The Center codes business received to the appropriate source, and the direct billing statement reflects this. The carrier provides separate codes for each agency (and therefore renders three direct bill statements), and is requested to offer production and loss runs on each agency as well as a consolidated statement.


Since it has been said that contracts are nothing more than the implementation of what a handshake was meant to be, they are an important element in defining what we've created. The various contractual agreements include:

  1. The individual agency agreement with the Service Center, defining the relationship in terms of ownership, compensation, duties, and responsibilities.
  2. The corporate defining documents that specifically address:
  1. Membership requirements
  2. Membership termination
  3. Admittance of new members
  4. Underwriting integrity
  5. Company contracts/relationships
  6. Profit-sharing division of revenues
  7. Niche marketing agreements
  8. Competition for new accounts
  9. Earned/audited premium collection
  10. Data processing equipment/software
  1. The establishment of 'task forces' to identify and resolve problems and explore opportunities. Task force missions may include:
  1. Examination of all pertinent data to determine the marketing position of each carrier
  2. Determination of appointment of new carriers
  3. Determination of termination of existing carriers
  4. Development of a system to investigate each prospective agency/agent who applies to the cluster to become a member
  5. Perpetuation planning/funding with appropriate documents defining terms
  6. Personnel staffing and training of service representatives
  7. Recruiting, screening, and compensation of additional producers


These are not the only areas where task forcing may be employed, but they represent, in my opinion, the basic areas most likely to cause concern-and friction.




Clustering may be a valuable tool for the growth and profitability of your agency, or it might not fit into your management philosophy. Whichever the case, clustering is clearly playing a role in the future of your carriers and fellow agents.


Roy L. Phillips, CIC, CPIA can be reached at Dan R. King & Associates, 4888 Loop Central Drive, #100A, Houston, TX 77081, (713) 667-8438, fax (713) 667-1560.

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